GBP/EUR Conversion Forecast Below 1.30 Despite G.D.P Boost

Studies for the GBP to EUR exchange rate confirms that the balance of risks remain biased towards further declines - here are the key levels and events to watch.

January's rosy GDP figures showed UK economic growth rising by 0.5% in Q4 and 1.9% year-on-year – both of which were in-line with expectations.

The data has allowed sterling to push higher against the euro with the pair being seen at 1.3148 at the time of writing, higher than the 1.3079 close recorded on Wednesday and the 1.3120 seen on Thurdsay. Bank transfers are quoted around 1.2790 and independents are seen offering rates around 1.2950-1.30.

Despite the gains, there are concerns traders will sell into any GBPEUR strength. Long-time sterling bears at HiFX - the foreign exchange brokerage - continue to see downside in the rate.

“We expect Sterling to push back higher against the Dollar in the months ahead," sys Andy Scott, economist at HiFX, "against the Euro, we see risks for it to move back below 1.30 as the economies there continue to benefit from the ECB’s Q.E. and monetary stimulus, boosting confidence and employment,”

Next Thursday's Bank of England rate meeting and the release of the quarterly Inflation Report may increase volatility in the short-term. 

Sterling traders' real concerns over the medium term, however, are related to Brexit; and for the technically inclined these are reflected by the giant head-and-shoulders pattern bearing down on the weekly chart.

Latest Pound/Euro Exchange Rates

	Live: 1.1451▲ + 0.07% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1062 - 1.1107
**Independent Specialist	1.1291 - 1.1336 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The pattern’s neckline at 1.3367 has already been breached and the exchange rate has moved down to 1.2893 lows, however, from there it has bounced back up to 1.3288. Currently it is languishing in the 1.3130's.

There seems little conviction in the current recovery move, illustrated by the lack of money flow on the 4-hr chart, and whilst it is possible the correction could manage a final wave higher, perhaps all the way to the level fo the original neckline, in what is known as a “throw-back” from there it is likely to air-kiss the neck-line goodbye and move back down in line with the dominant down-trend.

For confirmation of a continuation lower the conservative trader would look for a break below the recent 1.2893 lows leading to a move down to the 200-week MA at 1.2627, those with a greater stomach for risk would go for a short at the high point of the throw-back, with a tight stop just above the level of the neckline.

Brexit's Shadow

Unfortunately for sterling, speculation about Brexit is overshadowing any focus on data and this is likely to continue until the matter is resolved.

According to a note from ING Bank resolution hinges very much on what happens at the European Council meeting on the 18th and 19th of February:

“..The initial suggestion was that the referendum would be held by the end of 2017, but it could come as soon as this summer if a deal is agreed on at the European Council meeting on 18 and 19 February.

“The assumption is that Mr Cameron can then tell the electorate that he has won a “better deal for Britain” that will convince a majority of Britons to vote in favour of keeping the UK in the EU at a June referendum.”

Until a resolution is found the uncertainty associated with not knowing is weighing on growth regardless of the actual outcome:

“Irrespective of the outcome, the uncertainty that the vote will generate is likely to see a loss of momentum in the UK economy – possibly knocking around a quarter of a percent off 2016 growth.

“Both UK and foreign businesses are likely to take a “wait and see” approach to hiring and investment, while consumer spending and confidence could weaken modestly.

“The Bank of England will sit on its hands and sterling is likely to continue softening in the build-up to the vote – touching 1.32 versus the USD.”

What if Britain Votes to Leave the EU?

The ING report goes on to model a scenario of what would happen if Britain left the E.U.

Firstly, there would be a direct impact on “Trade and Investment” which would shave 1.5% off GDP in 2016.

Initially, there would be threats to jobs and growth – although the picture is complicated by the high number of E.U nationals in the workforce and what their new status would be.

Sterling would probably weaken due to the BOE easing.

Eventually, however, a weaker pound would boost competiveness and bilateral trade agreements would fill the void left by exit from the common market.